Even though mid-cap stocks have been major laggards so far this year, there still are pockets of value in this segment. Investors looking to add some midcap exposure to their investments can consider buying units of ICICI Prudential Discovery Fund. The fund follows a ‘value investing' strategy and therefore comes tagged with lower risks than its mid-cap focused peer funds.
This holds considerable investment merit in the present market. A decent returns scorecard and a promising portfolio of stocks also add up in the fund's favour. Investors may, however, consider a phased exposure by way of a systematic investment plan, given the high volatility in the markets at present.
SUITABILITY
Though the fund makes for a lower-risk option within the universe of midcap stocks, the risks are far higher in relation to large-cap or index funds. The fund, therefore, makes a good investment option for investors with some appetite for risk. That apart, the fund's value-investing strategy and mid-cap bias necessitate a long-term investment horizon.
PERFORMANCE
While the fund's one-year returns are in the negative, it is better than that of its benchmark CNX Midcap. The margin of outperformance over a three-year period however is way higher. During a three-year period, the fund delivered a compounded return of approximately 18 per cent. This compares quite favourably with many of its peers.
It also enjoys a fairly reasonable record in containing downsides. For instance, between January 2008 and March 2009, the Discovery Fund managed to contain the fall in its Net Asset Value (NAV) to approximately 59 per cent, marginally less than the Sensex. That even diversified funds with relatively a large-cap bias struggled to do this during the period highlights the efficacy of the fund's value-investing approach. Its five-year returns, however, are just in line with its benchmark, as the fund had been a marked underperformer in the bull markets of 2006 and 2007. The fund has, however, managed to improve its performance since then. Its returns during one-, three- and five-year periods compare favourably with its category average too.
PORTFOLIO
While there is no doubt that investing in midcap stocks is now ridden with risks, the fund's portfolio choices have been somewhat offbeat. Contrarian and dividend yield stocks (and sectors) with a focus on low Price-Earnings (PE) stocks make up its portfolio.
The fund has also occasionally dabbled in derivatives and made periodic cash calls while rebalancing its equity exposure. Its portfolio is also prone to frequent changes, and therefore enjoys a relatively high portfolio turnover.
In its current portfolio, large-caps (stocks with more than Rs 7,500 crore market capitalisation) make up more than 36 per cent of its overall portfolio, while mid- and small-caps make up 24 per cent and 34 per cent, respectively.
While banks, software, auto ancillary, and cement make up its top sectors in its latest portfolio, the stock choices within that aren't typical. For instance, stocks such as Rain Commodities, CESC and Standard Chartered PLC find a place in its top ten stocks' list.